450 Billion Twenties

The Daily Reckoning PRESENTS: The bane and beauty of paper money is that there is no limit to how much you can print. The Treasury could pay off the entire national debt, simply by printing nine, one trillion dollar bills. Of course, if it were up to the Mogambo, he wouldn’t print anything he couldn’t use at the convenience store. He would much prefer…

450 BILLION TWENTIES

A lot of “people-who-should-know” are writing of impending asset deflation, and that this fall in prices will probably include gold.

I personally have no idea, but the historical record shows that while assets of all kinds can, and do, go down (a lot of time disappearing altogether!) at the end of bubbles and booms, gold does not necessarily do so; and if it does, it does not stay there.

I hear the catcalls and hooting that this has elicited, and haughtily reply that for proof of my audacious statement, I merely have to point to the fact that gold is selling for about $660 an ounce, and if in the last 4,000 freaking years it went down and stayed there, then how in the hell did it get back to $660 an ounce now, and with essentially the same buying power?

But aside from that, one of the big, big, BIG reasons that I think gold will be supported (and will rise) is the fact that, as the domestic dollar goes down in value against other currencies, the price of gold in those other currencies will have to fall, too, as arbitrageurs will buy gold in the United States and sell it in those other countries to exploit the price differential. This, or the price of gold priced in dollars will have to rise, or both.

So, if gold fell in dollar terms while the dollar was falling in value, then the price of gold would have to collapse, too, in the countries with strengthening currencies, to achieve parity!

But the whole idea of gold falling in price, when priced in a depreciating currency, (especially one as continuously, massively overly-abused as the dollar and used by a country that is almost universally despised as vicious, murderous, greedy American imperialists), is the kind of thing that makes me laugh nervously and slowly, as I imperceptively move my hand towards a concealed weapon of some kind, since I have a Very, Very Difficult (VVD) time even conceiving of such a bizarre thing.

And while I can’t think of a single historical instance of gold going down in terms of a collapsing currency (and I thus assume that it has never, ever happened before, either in real life or in the movies), I nevertheless CAN think of many real and cinematic instances where having a lot of gold and firepower has come in Very, Very Handy (VVH) when things got bizarre like this.

But now, all of a sudden, after all these hundreds and hundreds of years, and the thousands of failed fiat currencies falling victim to their respective idiotic governments and irresponsible central banks printing, creating and spending too much money, I am supposed to think that this time gold will fall, for the first time ever and for no reason at all? Hahaha!

And don’t get me started on silver, which is the most undervalued necessity on the face of the planet right now, and which will continue to get more and more so until the price soars from these lowly levels.

The appearance of the U.S. Comptroller, David Walker, on 60 Minutes telling the sad tale of the coming economic collapse, has caused quite a stir. And I am sure that he is certainly correct down to the last decimal place, as far as I am concerned.

And I also agree that it is truly alarming that there will be gigantic entitlement programs and zillions of people will be benefiting from getting government money, and how there won’t be many people working to pay the taxes that are necessary to pay this crushing entitlement burden, and how taxes will have to rise to more than two-thirds of incomes to pay for all of these Medicare, Social Security, Medicaid other welfare programs, and on and on, blah blah blah.

And then I think to myself “Nah!” I mean, that kind of economic collapse is old-fashioned. And kind of quaint, in a charming kind of way.

I mean, debts mean nothing – nothing! – if you have a pure fiat currency! Ergo, it is entirely possible for the Congress to declare that they are, effective immediately, calling in all the bonds the government has issued! They can easily direct the Treasury to literally pay off the entire national debt, all $9 trillion of it, by lunchtime tomorrow, just by writing a check! And the money to honor the checks? It will be dutifully created by the Federal Reserve, because that is the kind of shameless, willing whore that it is!

So, (and here is why the government loves a fiat currency) with a fiat currency, they can simply print up nine trillion-dollar bills! Nine little pieces of paper! Or, alternatively, 9,000 billion-dollar bills! Lest you chastise me for lack of practicality, I recognize the fact that you can’t spend anything bigger than a twenty at a convenience store without some flunky clerk getting all huffy (and pretty soon we’re screaming at each other, where I learned that they REALLY don’t like it when you tell them that their ridiculous foreign accents make them sound as stupid as they look!) Hahaha! Who knew, huh? Hahaha!

So in response to this growing problem with snotty cashiers in our nation’s convenience stores, I suggest that they print up two trillion-dollar bills, 5,000 billion-dollar bills, and 2,000,000 million-dollar bills.

Now that I look at it, I am embarrassed to note that none of these bills, unfortunately, can be spent at a convenience store, either. Oops! So maybe we ought to print up the whole $9 trillion thing with 450 billion twenties, which is so damned much paper money that the sheer logistics of harvesting the trees, making the paper, making the ink, making the printing presses, printing the damned stuff and distributing/accounting for the cash will result in so much economic activity that it, single-handedly, would cause the economy to boom!

So why don’t they do that? The only reason that they don’t do that is that every time a government in all of history has tried such stupidity, such an instantaneous explosion in the money supply collapsed the currency, stoked an inflationary bonfire, and the party was soon over, long before the salvation of a hoped-for miracle arrived.

Better than that, today we (oddly enough) prefer to do it like we have been doing it; by spending as much as we possible can without raising a ruckus, or causing too much inflation that it causes a ruckus, or (failing that), lying and scheming like we have never lied and schemed before.

In other words, instead of being economically killed at a stroke, we are being consumed a little bit at a time, as a little inflation at a time is eating away at the dollar’s buying power a little at a time, like a relentless, incurable cancer, all made necessary because the government now must borrow and spend evermore money to ameliorate the inflationary effects of the previous little inflations, a little bit at a time! Hahaha! A cancer, indeed!

This economic insanity is the ugly system that has evolved, thanks to the socialist/communist boneheads and traitors that we elected. This is the supposed genius of the democratic process? Hahaha! I snort in Caustic Mogambo Derision (CMD)!

Until next week,

The Mogambo Guru
for The Daily Reckoning
March 26, 2007

**** Mogambo sez: Your future will be golden and your clouds will all have silver linings if you can decipher what in the hell I mean by that, and then do it. Otherwise, not.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

What’s it all about, Alpha?

Alpha (above market returns) is what hedge funds are supposed to bring investors. Alpha is why they get away with charging outrageous fees (usually 2% of capital and 20% of performance).

Alpha is why (developing a case of ‘mission creep’) the funds then began speculating rather than hedging.

But after that came news of another extraordinary development: Hedge funds started going public. The lay public, it seems, was willing to pay more for alpha than alpha was making for the funds. What gives?

Take a look at the amazing sale of shares in the Blackstone Group. Blackstone is one of the multi-billion dollar groups of ‘private equity’ money that prove to us that Wall Street is no place for an honest man.

Think about it for a minute, and it almost makes you stop breathing. The idea of the hedge fund is, primarily, that it can protect investors by hedging risk; and it does so by being able to go both long and short.

Mutual funds, by contrast, are always long. You buy a fund that invests in China, for example, because you want a little sliver of the China pie. If Chinese shares go up, you want to go up with them. But you know you’re not competent enough to select shares in China yourself, so you don’t mind paying a mutual fund manager to help you. It wouldn’t make any sense for the manager to hold cash…you could do that yourself without paying a commission or fee.

Then along came the hedge fund with a different mandate – to make money even if shares go down. The idea was to protect the investor on the downside. It’s all very well to own shares in China and the United States, but what if the shares go down? The hedge fund manager hedges an investor’s bets, by shorting (selling shares he doesn’t own) or by using put options (giving him the right to buy shares at a lower price) or other strategies designed to make money when most investors lose it.

Then came the curious news that a few hedge funds were selling shares to the public. This too took our breath away. The only justification for the high fees was the ‘alpha’ performance; but if a hedge fund manager could get ‘alpha,’ why would he want to sell shares to perfect strangers? Hedge fund managers can do math. They wouldn’t sell shares of their own fund unless someone else thought they were worth more than they did. From this you could infer that either the public was paying more for alpha than alpha was worth…or, that there really wasn’t any alpha at all.

And now, before us is private equity – the hottest thing on Wall Street, because it delivers alpha. In theory, you can’t really beat the public market – because it has so much more information than any individual investor or group of investors. But along came private equity money…and phyzzzt went the theory. In fact and in practice…the smart, well-informed, well-funded private investors were letting us know that they were the ones making money, not the rubes in the public marketplace.

But private equity is going one step further now…a step too far, in our opinion. The Blackstone Group is going public to raise billions of dollars. “Look,” it says to the rubes, yahoos, and lumpen capitalists, “We can get you alpha; buy our shares.”

But the Blackstone Group is not a religious or charitable order. They are not going to give away alpha. Nor are they innumerate; they can do the math. The only circumstance in which they would possibly sell their shares to the public was if they felt their alpha was over-estimated by the share-buying public…or, they didn’t have any alpha.

What is happening to private equity is what has happened to hedge funds…and what happens to everything else in the markets…and indeed, to the rest of life. Alpha – the extraordinary, the special, the above-market – is in short supply. And the more people chase after it, the harder it is to get.

As more capital sought out more above-market returns, the returns fell. That’s why hedge funds are already yesterday’s news.

Now private equity too, is running into the Law of Diminishing Returns. Or, the Law of the Declining Marginal Utility of Capital Chasing Alpha.

Private equity is probably selling to the public for the same reason hedge funds did: They’ve lost alpha.

Meanwhile a look at the headlines tells us immediately what ‘gives’ in the market these days:

Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis…

“Friday the dollar rallied as reports showed housing had rebounded and traders reduced bets that the Federal Reserve will cut interest rates. However, this latest dollar rally will likely be short lived.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig

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And more thoughts…

*** Remember Harry Dent?

He’s the one who forecast the Dow at 40,000, based upon his reading of demographic trends. All those aging baby boomers had to save for their retirement, he said. And the logical place for them to put their money was in the stock market.

Well, as the years have passed…it now becomes clearer that the boomers aren’t all that interested in saving money – not when credit is easily available and when their houses are rising in price. So, this past November, Dent felt it was time for a little backtracking. Now he says the new bubble will reach its maximum in late 2009, with the Dow near 20,000 and the Nasdaq at 5,000.

Could he be right? Anything is possible. We suspect that the boomers will start saving again. They’ve been on a spending binge for the last 10 years. They’re probably about ready to go on a saving binge. Not only will they need the money, we’ve noticed signs that saving money is becoming avant-garde. There may be a backlash against conspicuous consumption coming. We’ll have to explain more tomorrow – when we take up our new theory of modern politics, but there are times when spending is hip, stylish and trendy. There are other times when spending is regarded as vulgar, crass and foolish. The times could be changin’ now.

*** If boomers begin saving…what will they do with their money? Will they put it in stocks? Or real estate?

We noticed, recently, how much of a drag owning real estate is. You’re not bothered by it when prices are rising sharply. But when they begin to flatten out…and when sales sag…you begin to resent having to fix the roof or the dishwasher.

This came home to us when we looked at what it costs us to hold onto our farm in Maryland. There are a couple of houses on the farm, which are rented out. It should be making money for us, but instead, we get this message from our property manager:

“Last year there was around an $8,500 loss. The main house was rented for $2,500 a month for six months. We had to replace an HVAC in the dairy apartment, a water heater in the tenant house, a heating stove in the barn, carpet in the dairy apartment.

Last year we spent the following for maintenance and repairs (parts & labor) on each of the buildings:

We doubt boomers will want to deal with these problems. And we wouldn’t be surprised to see attitudes to real estate revert back to what they were 30 years ago – when people regarded property as an expensive burden, not as an investment.

*** Want to buy property where property is still going up? Buy in Japan. For the first time in 16 years, Japanese real estate prices are going up nationwide.

The biggest gains came in Tokyo commercial property – where prices were up by 9.4% in 2006.

About The Mogambo Guru:

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning , and other fine publications. For podcasts featuring the Mogambo, click here.